Indocement Tunggal Prakarsa: A Deep Dive into Its Prospects

Broker: UOB Kay Hian

Date: Wednesday, 13 November 2024

Company Overview

Indocement Tunggal Prakarsa (INTP IJ) is a leading manufacturer and seller of cement, ready-mix concrete, and aggregates, including andesite stone quarries. The company operates 13 plants across Citeureup, Cirebon, and South Kalimantan, with a total annual cement production capacity of 25.5 million tonnes.

Stock Data

GICS Sector: Materials

Bloomberg Ticker: INTP IJ

Shares Issued: 3,681.2 million

Market Cap: Rp25,952.7 billion (US\$1,644.4 million)

3-Month Avg Daily Turnover: US\$1.0 million

52-Week High/Low: Rp10,200/Rp6,275

Major Shareholders: Birchwood Omnia Ltd (51.0%)

FY24 NAV/Share: Rp5,696

FY24 Net Cash/Share: Rp1,307

Price Performance

Over the past year, Indocement’s share price has seen a 25.0% decline, with a slight recovery of 1.1% in the last three months. The current share price is Rp7,050, with a target price set at Rp7,800, reflecting a 10.6% upside.

Analyst’s Upgrade and Earnings Outlook

UOB Kay Hian has upgraded Indocement’s rating to “BUY” from a previous recommendation, with a revised target price of Rp7,800, up from Rp7,300. The expectation is that the company’s earnings will recover by 8.1% in 2025.

Market and Demand Projections

National cement demand is projected to grow by 2-3% in 2025, with Indocement’s sales volume expected to rise by 2%. The bag cement segment remains highly competitive, with Semen Merdeka planning a price increase in 4Q24.

3M Housing Programme Impact

The 3m housing programme, targeting 2 million houses and 1 million apartments, could increase national cement volume by up to 9%. This programme is expected to generate an estimated demand of 8.7 million tonnes of cement. However, execution challenges due to the limited budget of Rp5 trillion and land availability issues remain.

Industry Challenges and Opportunities

The cement industry faced a challenging 2024, with a 2% decline in bag cement volume due to weak purchasing power. However, a recovery in purchasing power is expected to support a 2-3% growth in national cement demand in 2025. Indocement’s sales volume is anticipated to rise by 2% year-over-year. There are concerns about a potential 5% cut in the 2025 infrastructure budget, which could dampen demand growth, particularly in bulk cement.

Government Initiatives and Indocement’s Strategy

The government’s pro-consumption initiatives, such as free lunch programmes and incentives for VAT and land & building permit taxes, are expected to support demand. In parallel, Indocement aims to increase its use of alternative fuels, targeting a rise in alternative fuel usage to 25.0% by 2025, up from 21.1% in 9M24.

Financial Performance and Projections

Indocement’s revenue is expected to grow by 4% year-over-year in 2025, driven by a 2% increase in volume and a 2% rise in blended ASP. Despite stable energy costs, an increase in packaging costs is anticipated to result in a 1.4% increase in COGS/tonne. The company is likely to maintain its debt level and finance cost, given its good credit rating and low-interest rate of 7.4%. Earnings are projected to expand by 8.1% year-over-year in 2025 to Rp1.6 trillion.

Key Financials

Domestic Cement Industry & INTP’s Market Share Growth

Indocement’s market share in various regions has seen varying degrees of growth. Notable changes include a 15.2% increase in Central Java and a 3.8% increase in Yogyakarta. However, the company faced declines in East Java and Sulawesi.

Potential ASP Increase with Stable Costs

In the bag segment, competition remains robust, with Semen Merdeka considering a near 6% ASP increase in 4Q24. This could potentially encourage similar moves from other second-tier players. On the cost front, energy expenses may ease slightly with a decline in coal prices and a stable rupiah. However, packaging costs, accounting for about 7% of INTP’s COGS, are expected to rise by up to 10%. Additionally, a planned 1% VAT increase in 2025 may present further demand challenges.

Earnings Revision and Risks

UOB Kay Hian has revised their 2024-25 earnings forecasts down by 26.9% and 26.2%, respectively, primarily due to reduced expectations for sales volume and ASP. This adjustment reflects a more conservative outlook, considering the weakness in the bag cement segment.

Valuation and Recommendation

The target price for Indocement has been upgraded to Rp7,800 from Rp7,300, based on -1.5 SD from the five-year EV/tonne average and an 8x EV/EBITDA. The increase in target price is driven by rolling valuation to 2025 and factoring in a higher projected cash balance for 2025, due to a more moderate capex forecast. Indocement is appreciated for its prudent cost management and efficiency amid a highly competitive industry landscape.

Conclusion

Indocement Tunggal Prakarsa is positioned for growth despite the challenges in the cement industry. With strategic initiatives, government support, and efficient cost management, the company is expected to see a recovery in earnings. Investors are encouraged to consider the “BUY” recommendation with a target price of Rp7,800, as Indocement navigates the competitive landscape with resilience and strategic foresight.